Hodgson Russ LLP

The Employee Benefits Practice is pleased to present the Employee Benefits Developments Newsletter for the month of April 2021. Click on the links below for more information on each specific development or case.

Circuit Court Finds Claims of ERISA Fiduciary Breach Do Not "Relate to" Employment for Purpose of Employment-Based Arbitration Agreement

Release of Claims Fails to Block ERISA Lawsuit

Amounts Paid for Personal Protective Equipment Treated as Medical Expense

Fidelity Not Acting as ERISA Fiduciary in Charging Access Fee to Mutual Funds Hosted on its Retirement Plan Investment Platform

District Court Holds TPA is a Fiduciary and Exclusion of Autism Treatment Violated Parity Act

Claims Administrator Potentially Liable for Delay in Paying Claims


Circuit Court Finds Claims of ERISA Fiduciary Breach Do Not “Relate to” Employment for Purpose of Employment-Based Arbitration Agreement

With a 2-1 split decision, the Second Circuit reversed and remanded a district court decision compelling a former employee to arbitrate his ERISA fiduciary breach claims, although the defendant was not a party to the agreement requiring arbitration of employment-related claims. We previously reported on the district court’s decision to compel arbitration here.

Clive Cooper participated in the DST Systems, Inc. 401(k) Profit Sharing Plan (“Plan”) whose investments were managed by Ruane Cunniff & Goldfarb Inc. After Cooper realized the benefit he was going to receive from the Plan was not nearly what he expected it would be, Cooper accused DST and Ruane of fiduciary breaches under ERISA, alleging losses exceeding $100 million arising from imprudent investments, failure to monitor, self-dealing, and excessive fees. After filing suit in the district court, Cooper voluntarily dismissed DST from the lawsuit leaving Ruane as the sole defendant.

When Cooper became a DST employee, he received an Associate Handbook containing an Arbitration Program and Agreement covering “all legal claims arising out of or relating to employment.” The district court found that Cooper’s claims for alleged mismanagement of Plan assets “arose out of” and “related to” his employment with DST and, hence, were subject to arbitration. As a result, the judge held that Ruane could compel arbitration, although not a signatory under the Arbitration Agreement, under the doctrine of equitable estoppel.

On appeal, the Second Circuit reversed the district court’s order to arbitrate and remanded the case for further proceedings. First, the circuit court noted that despite the Federal Arbitration Act’s national policy favoring arbitration, courts may only order arbitration of a dispute when the parties agreed to arbitrate the dispute. Thus, the question became whether Cooper’s claims against Ruane were covered by the phrase “all legal claims arising out of or relating to employment” in the Arbitration Agreement.

Following persuasive precedent from the Fifth and the Eleventh Circuits, the court decided that the “but for” test is not the appropriate inquiry when the interpreting the phrase “relating to” in the context of an employment-based arbitration agreement. Instead, the Second Circuit ruled that “in the context of an employment arbitration agreement, a claim will ‘relate to’ employment only if the merits of that claim involve facts particular to an individual plaintiff's own employment.”

In Cooper’s case, the court found that “none of the facts relevant to the merits of Cooper's claims against Ruane relates to his employment. Cooper's claims hinge entirely on the investment decisions made by Ruane; the substance of his claims has no connection to his own work performance, his evaluations, his treatment by supervisors, the amount of his compensation, the condition of his workplace, or any other fact particular to Cooper's individual experience at DST.” Consequently, the district court’s order to compel arbitration was reversed and remanded.

Notably, the Second Circuit decided not to resolve an increasingly common conundrum. The Second Circuit has “construed ERISA § 502(a)(2) to require parties suing on behalf of a plan to demonstrate their suitability to serve as representatives of the interests of other plan stakeholders.” When arbitration clauses prohibit joinder of multiple parties, however, it is unclear how an employee can bring an ERISA suit that satisfies the adequacy-of-representation requirement while also comply with the arbitration agreement. As the court said, “Either [the claimant] brings a claim in arbitration in some representative capacity, as our case law requires, and the claim is dismissed for violating the Agreement's prohibition on bringing claim in a representative capacity; or she brings a claim absent the required procedural safeguards, and courts in this Circuit decline to enforce any award she secures in arbitration for running afoul of [the adequacy-of-representation requirement].” This part of the decision is dicta, but it is an issue that will require the court’s full attention soon.

This case is a reminder that arbitration clauses can only reach so far and need to be drafted carefully. Companies with large retirement plans that wish to implement an arbitration agreement to encompass ERISA fiduciary breach claims should discuss the potential pitfalls, like having a substantial number of arbitrations filed at once, with legal counsel.

Cooper v. Ruane Cunniff & Goldfarb Inc., 990 F.3d 173 (2d Cir. 2021).

Release of Claims Fails to Block ERISA Lawsuit

A recent case of interest involved a plaintiff who worked at an IKEA store for twenty five years. During his employment, he enrolled in and received basic and supplemental term life insurance coverage, and his spouse maintained coverage as a dependent. IKEA also maintained a retiree benefit plan. Continuation of the term life insurance, for supplemental benefits and for dependent coverage, were included in the retiree life insurance benefit program. Based on information he received regarding the retiree life insurance benefit program, plaintiff believed he and his spouse would be eligible, without further medical examination, to “continue” the basic and/or supplemental life coverage for himself and his spouse that was in effect while actively employed by IKEA.

Plaintiff retired in 2018. When plaintiff retired, he received 52 weeks of pay in exchange for which he signed a voluntary release which included, as of the date of execution, a release of “any and all claims, known and unknown, asserted or unasserted,” plaintiff had under ERISA (except for any vested benefits under any tax qualified benefit plan). He elected to participate in the retiree life insurance benefit program, but did not immediately receive his options for retiree life insurance benefits. Following repeated inquiries, IKEA informed plaintiff he could not receive life insurance benefits under the active employee plan, but could convert this benefit to a whole life individual policy with MetLife. MetLife, however, would not provide plaintiff a policy without a medical examination, which was contrary to plaintiff’s understanding based on information IKEA had provided regarding the retiree life insurance benefit program. As it turned out, plaintiff and his spouse were uninsurable, which meant he was unable to secure the life insurance the coverage he believed he would receive as a retiree under the IKEA plan.

After exhausting all administrative options and remedies, plaintiff filed a lawsuit in response to which IKEA filed a motion to dismiss. IKEA argued plaintiff could not assert his ERISA claim because the release he signed prohibited him from doing so. Plaintiff responded that the claim did not exist as of the date he signed the release and therefore is not covered by the release. The trial court in Georgia found the plaintiff’s arguments more persuasive and denied IKEA’s motion to dismiss because the ERISA claim did not arise until after the release was signed. The court ruled that plaintiff’s ERISA claim did not fall within the scope of the release agreement because, under the facts alleged in plaintiff’s complaint, IKEA denied plaintiff the benefit of continuing his life insurance after the release agreement was executed, the life insurance benefit was promised under a retiree plan that the plaintiff was not determined to ineligible for until after the release agreement was executed, and IKEA continuously misled plaintiff as to his benefit eligibility after the release agreement was executed.

Anastos v. IKEA Property, Inc., 2021 WL 1017410 (N.D. Ga.)

Amounts Paid for Personal Protective Equipment Treated as Medical Expense

The IRS has announced that amounts paid for personal protective equipment (PPE) such as masks, hand sanitizer, and sanitizing wipes, purchased for the primary purpose of preventing the spread of COVID-19, will be treated as amounts paid for medical care under Section 213(d) of the Internal Revenue Code (Code). Therefore, if these amounts are not compensated for by insurance or health plans, are deductible under Section 213(a) of the Code provided that the taxpayer’s total medical expenses exceed 7.5% of adjusted gross income.

Further, because these amounts are expenses for medical care under Section 213(d) of the Code, these amounts are eligible to be paid or reimbursed under health flexible spending arrangements (health FSAs), Archer medical savings accounts, health reimbursement arrangements (HRAs), and health savings accounts. If the amount is paid or reimbursed under one of these accounts or by a health plan, they are not deductible under Section 213(a) of the Code. If the terms of the group health plan, including health FSAs or HRAs, provide that expenses for COVID-19 PPE may not be reimbursed, the plan may be amended to provide for the reimbursement expenses for any period occurring on or after January 1, 2020. If an amendment is needed, this amendment must be adopted retroactively by December 31 of the first calendar year after the end of the plan year in which the amendment effective and, if the amendment is retroactive, by no later than December 31, 2022. IRS Announcement 2021-7 https://www.irs.gov/pub/irs-drop/a-21-07.pdf.

Fidelity Not Acting as ERISA Fiduciary in Charging Access Fee to Mutual Funds Hosted on its Retirement Plan Investment Platform

The First Circuit court of appeals has affirmed a federal district court’s dismissal of a class action lawsuit brought against Fidelity, arguing that it breached its duties as an ERISA fiduciary when it charged “infrastructure fees” to mutual funds hosted on its investment platform.

Fidelity is a well-known recordkeeper and directed trustee, providing services to thousands of U.S. retirement plans. Fidelity offers a “supermarket” of mutual funds from which employer-sponsors can choose when creating the slate of investments offered to retirement plan participants. Fidelity charges an “infrastructure fee” to unaffiliated mutual fund managers in exchange for offering their funds on its platform, hence giving those funds access to millions of retirement plan investors.

In evaluating plaintiffs’ claims, the court noted that fiduciary status was not an “all-or-nothing designation” under ERISA. The plaintiffs argued that Fidelity acted as a functional fiduciary under ERISA by charging the infrastructure fees for two primary reasons: (1) because Fidelity exercised control over the compensation it received from the retirement plans, and (2) because Fidelity’s control of the “supermarket” menu of investment choices, ultimately impacted the array of retirement plan funds offered to participants.

The court disagreed with the plaintiffs’ theory that in charging the infrastructure fee, Fidelity controlled compensation that was passed through to the plans. This theory was rejected because it, “overlooks the numerous intervening and independent decisions inherent in the so-called pass-through,” including the mutual funds’ decision to be included on the Fidelity platform and negotiation of the fee, the mutual funds’ decision whether to pass on all or part of the fee as an expense to investors, the retirement plan investment fiduciaries’ selection of the funds to include on the retirement plan’s investment slate, and, ultimately, the participant’s individual choice among the plan’s investment options.

Next, the court addressed the argument that Fidelity’s control of the “supermarket” indirectly controlled the funds the retirement plans offered to participants. Citing caselaw and a DOL advisory opinion letter directly on point, the court discarded the argument that a plan service provider acts as a fiduciary when selecting or removing a fund from its program of investment offerings. Indeed, Fidelity’s role as directed trustee precluded from consideration any notion that it had a fiduciary advisor role in making the investment selections at the plan level.

The case indicates that retirement plan service providers do not take on functional fiduciary duties merely by maintaining an investment platform, where the authority over the investment options offered to participants is retained by the plan-level investment fiduciaries.

In re: Fidelity ERISA Fee Litigation, 2021 WL 836766 (1st Cir. 2021)

District Court Holds TPA is a Fiduciary and Exclusion of Autism Treatment Violated Parity Act

The US District Court for the Northern District of California recently held that a third party claims administrator (TPA) breached its fiduciary duty in excluding certain autism related services under an employer’s self-funded medical plan. An entity may be considered a fiduciary by being formally identified as a “named” fiduciary of the plan, or a “functional” fiduciary based on its actions. Although the TPA argued it was neither a named nor a functional fiduciary, the court found that the TPA exercised sufficient discretion in making benefit determinations to be considered a functional fiduciary with respect to the participant’s benefits under the plan. The court also held that the exclusion of autism services under the plan violated the Mental Health Parity and Addiction Equity Act (“Parity Act”). The Parity Act generally prohibits a plan from imposing treatment limitations on mental health benefits that are not imposed on medical/surgical benefits. Here, the exclusion created a separate treatment limitation applicable only to services for a mental health condition and therefore violated the plain terms of the Parity Act. This case highlights two issues of increasing importance to sponsors of self-insured medical plans - fiduciary compliance and compliance with the Parity Act. The recently enacted Consolidated Appropriations Act requires plan sponsors to be prepared to provide a comparative analysis of non-quantitative treatment limitations on mental health and substance abuse disorders. We expect additional guidance on the implementation of these new rules.

Doe v. United Behavioral Health, 2021 WL 842577 (N.D. Cal.)

Claims Administrator Potentially Liable for Delay in Paying Claims

Technibilt, Ltd. (“Technibilt”) sponsored a self-insured medical plan (the “Plan”), for which Blue Cross and Blue Shield of North Carolina (“Blue Cross”) served as claims administrator. To protect against major claims during any period, Technibilt maintained a stop-loss policy. That policy covered claims paid during a policy period, rather than claims incurred during the policy period.

A covered dependent of a Plan participant became gravely ill with leukemia and incurred significant claims during 2018. Technibilt requested that Blue Cross pay the full amount of the claims in 2018. While a portion of the claims incurred in 2018 by the covered dependent were paid in 2018, a portion were not paid until 2019. The stop-loss policy did not cover the portion of the claim paid in 2019, resulting in an $810,470.81 loss to the Plan. The Plan subsequently filed suit against Blue Cross, alleging that the delay in reimbursing the claims constituted a breach of fiduciary duty.

Given the scope of its discretion in serving as claims administrator for the Plan, the district court quickly determined that Blue Cross was serving as an ERISA fiduciary. After deciding this threshold question, the district court denied both Blue Cross and Technibilt’s motions for summary judgment, but in doing so the district court recognized that a delay in reimbursing a claim could constitute a breach of fiduciary duty.

Technibilt Group Insurance Plan v. Blue Cross of Blue Shield of North Carolina, 2021 WL 1147168 (W.D.N.C. March 25, 2021).